Site for Sore Eyes: Economics of Domain Names

What is in a name? With Internet consumer laws changing, Google buying all sorts of new domains, the introduction of .film and recent UK government funding for Digital Economy research, it’s time to address some economics of domain names.

Like the economics of trade marks, the economics of domain names rests primarily on the information and signalling aspects of brands. In this case, the letters and words of the domain name provide information to the consumer and serve as a unique identifier for the website. However, unlike trade marks, the supply of domain names is much more restricted. Domain names are limited to alphanumeric characters, top level domain suffixes and practicalities such as length and legibility.

The restricted supply of possibly domain names encourages a creative market. Cue the advent of grammar and spelling that would have deeply offended my grandma. Instead, the restrictions on the ‘real estate’ or ‘space’ of domain names have lead to linguistic innovation. Cue also rather amusing failures (e.g. Speedofart, Oldmanshaven, and Americanscrapmetal.)

Like trade marks, there are also concerns about domain name squatting and everyone’s favourite portmanteau, typosquatting. While squatting is an example of a bad faith exploitation of the system, there are legitimate business models which rely on domain prospecting. Hence, like many points of intellectual property, the lines are are often blurrier than we might expect.

Trust is perhaps more important in domains than in trade marks. The big bad scary world of the internet is less frightening when the consumer recognises the brand and domain. Domain names can signal (or mis-signal) that a customer is on a trusted site. This is helpful for customers but also for suppliers. Domains with less brand awareness and trust must use more expensive, third party services, such as selling through Amazon or Google, to overcome the weaknesses of their domain name.

The .com bubble of 2000 took some shine off the glittering promise of domains. Dr. Thies Lindenthal, looking at domain prices for the years 2006-2013, found…

…on average, domain prices grew by 6.6 percent per year in the last 7 years, exhibiting a boom and bust pattern that closely resembles the path of the overall IT industry.

He also found high correlations between domain prices and trends in the high tech economy, and also with online advertising revenues.

Changes in search engines are possibly driving down the average price of a domain name. As search engines focus more on content and less on domain names, the bigger, more popular websites become even bigger and more popular. Whereas the earlier, perhaps more naive, days of the internet were more dependent on basic searches and consumer expectations, the playing field may have been more level. Instead, like many things in the digital era, the big become bigger and the small become smaller. This distribution is also consistent with the value of patents, trade marks and most intellectual property.

Restrictions on the market are changing. The introduction of non-latin alphabets expanded the supply of domain names and reduced the confusion caused by transliterations. And expanded it has, the Wikipedia list of domain names is impressive. Of course, the more top level domains, the bigger the available ‘land’ in the market. This increase in supply will exert a downward pressure on prices.

At the political level, unsurprisingly, existing domain owners favour the status quo and are against expansion. (Although, exceptions for smaller linguistic groups are popular.) With an ever expanding internet, news businesses will need domains and the pressure for expansion will continue. But this may increase both consumer confusion and the cost to business as brands spend more to protect trade marks from domain squatters. The domain name game is far from over.

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Launched in 2003 as a teaching aid for Intellectual Property Law students in London, the IPKat’s weblog has become a popular source of material, comment and amusement. IPKat covers copyright, patent, trade mark, info-tech and privacy/confidentiality issues from a mainly UK and European perspective.